UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2018 

OR

For the transition period from              to             

Commission file number 001-37903 

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The total number of ordinary shares outstanding as of May 7, 2018 was 26,523,253.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2018 

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless otherwise specified, references in this report to the “Company”, “AquaVenture”, “we”, “us” and “our” refer to both AquaVenture Holdings LLC and its subsidiaries prior to our corporate reorganization effected immediately prior to our initial public offering and AquaVenture Holdings Limited and its subsidiaries following our corporate reorganization.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to, and including, the date of this document. We expressly disclaim any obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date hereof. Such forward-looking statements are subject to risks, uncertainties and other important factors which could cause our actual results could differ materially from those discussed herein.

This Quarterly Report on Form 10-Q may contain estimates, projections and other information concerning our industry, the general business environment, and markets, including estimates regarding the potential size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual market size, may differ materially from the information reflected in this Quarterly Report on Form 10-Q. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” set forth under Part I, Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as updated by our subsequent filings with the SEC. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to the unaudited condensed consolidated financial statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying notes to the unaudited condensed consolidated financial statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

See accompanying notes to the unaudited condensed consolidated financial statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Description of the Business

AquaVenture Holdings Limited is a British Virgin Islands (“BVI”) company, which was formed on June 17, 2016 for the purpose of completing an initial public offering (“IPO”) as the SEC registrant and carrying on the business of AquaVenture Holdings LLC and its subsidiaries. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service (“WAAS”) solutions through two operating platforms: Seven Seas Water and Quench. Both operations are critical to AquaVenture, which is headquartered in the BVI.

Seven Seas Water offers WAAS solutions by providing outsourced desalination and wastewater treatment services for governmental, municipal, industrial and hospitality customers. These solutions utilize reverse osmosis and other purification technologies to produce potable and high purity industrial process water in high volumes for customers operating in regions with limited access to potable water. Through this outsourced service model, Seven Seas Water assumes responsibility for designing, financing, constructing, operating and maintaining the water treatment facilities. In exchange, Seven Seas Water enters into long‑term agreements to sell to customers agreed‑upon quantities of water that meet specified water quality standards. Seven Seas Water currently operates primarily throughout the Caribbean region and in South America and is pursuing new opportunities in North America, the Caribbean, South America, Africa and other select markets. Seven Seas Water is supported by an operations center in Tampa, Florida, which provides business development, engineering, field service support, procurement and administrative functions.

Quench offers WAAS solutions by providing bottleless filtered water coolers and other products that use filtered water as an input, such as ice machines, sparkling water dispensers and coffee brewers, to customers throughout the United States and in Canada. Quench’s point‑of‑use (“POU”) systems purify a customer’s existing water supply. Quench offers solutions to a broad mix of industries, including government, education, medical, manufacturing, retail, and hospitality. Quench installs and maintains its filtered water systems typically under multi‑year contracts that renew automatically. Quench is supported by an operations center in King of Prussia, Pennsylvania, which provides marketing and business development, field service and supply chain support, customer care and administrative functions.

2. Summary of Significant Accounting Policies

Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 2—“Summary of Significant Accounting Policies” of the notes to the audited consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of March 31, 2018, the unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2018 and 2017 and the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017. The unaudited condensed consolidated balance sheet as of December 31, 2017 was based on the audited consolidated balance sheet as of December 31, 2017, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 but restated for adoption of new accounting guidance which is further explained in the “Adoption of New Accounting Pronouncements” section below.

The unaudited condensed consolidated financial statements include the accounts of AquaVenture Holdings Limited and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: accounting for revenue from contracts with customers and the determination of transaction prices and allocation of revenues to remaining performance obligations; accounting for goodwill and identifiable intangible assets and any related impairment; property, plant and equipment and any related impairment; contract costs and any related impairment; share‑based compensation; allowance for doubtful accounts; obligations for asset retirement; and deferred income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Revenue Recognition

Through the Seven Seas Water and Quench operating platforms, the Company generates revenue from the following primary sources: (i) bulk water sales and service (excluding service concession arrangements); (ii) service concession arrangements; (iii) rental of water filtration and related equipment; (iv) sale of water filtration and related equipment, coffee and consumables and (v) water filtration-related services, including installation and maintenance. The revenue recognition policy for each of the primary sources of revenue are as follows:

Bulk Water Sales and Service.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers with a single performance obligation to deliver bulk water or a series of performance obligations to perform substantially the same services with the same pattern of transfer, which can include the operations and maintenance (“O&M”) of a customer-owned plant. The Company recognizes revenues from the delivery of bulk water or the performance of bulk water services at the time the water or services are delivered to the customers in accordance with the contractual agreements. Billings to the customer for both bulk water and the bulk water services are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for bulk water sales and service can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenue will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. Estimates of revenue for unbilled water are recorded when meter readings occur at a time other than the end of a period. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period. Revenues generated from both the delivery of bulk water and performance of services related to bulk water are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer include two performance obligations, including an implicit lease for the bulk water facilities and bulk water services, and a non-lease component related to O&M services. The implicit lease performance obligation is generally accounted for as an operating lease as a result of the provisions of the contract. The Company considers the implicit lease and bulk water services as a single performance obligation and the calculated transaction price can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. The revenue recognition pattern for both the lease and non-lease components are the same with revenues being recognized ratably over the contract period as delivered to the customer. Revenues generated from both the lease and non-lease performance obligations are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Service Concession Arrangements.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers that are determined to be service concession arrangements. Service concession arrangements are agreements entered into with a public sector entity which controls both (i) the ability to modify or approve the services and prices provided by the operating company and (ii) beneficial entitlement to, or residual interest in, the infrastructure at the end of the term of the agreement. Service concession arrangements typically include more than one performance obligation, including the construction of infrastructure for the customer and an obligation to provide O&M services for the infrastructure constructed for the customer. Billings to the customer for both service concession arrangements are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for service concession arrangements includes, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. The transaction price is allocated to the identified performance obligations based on the relative standalone selling prices of the identified performance obligations.

The transaction price allocated to the construction of infrastructure performance obligation is recognized as construction revenue within the consolidated statements of operations and comprehensive income. Construction revenues are recognized over time, using the input method based on cost incurred, which typically begins at commencement of the construction with revenue being fully recognized upon the completion of the infrastructure as control of the infrastructure is, or is deemed to be, transferred to the customer. In addition, service concession contracts typically include a difference in timing of when control is, or is deemed to be, transferred and the collection of cash receipts, which are collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the construction performance obligations if determined to be a material component of the transaction price. If a significant financing component is identified, the future cash flows included in the transaction price allocated to the construction performance obligations are discounted using a discount rate comparable to a market-based borrowing rate specific to both the customer and terms of the contract. The resulting present value of the allocated future cash flows is recorded as construction revenue with a related long-term receivable as control of the infrastructure is, or is deemed to be, transferred to the customer while the discount amount is considered to be the significant financing component. Future cash flows received from the customer related to the construction performance obligations are bifurcated between principal repayment of the long-term receivable and the related imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income as providing financing to our customers is a core component of our business model.

The transaction price allocated to the O&M performance obligation is recorded as bulk water  revenue within the consolidated statements of operations and comprehensive income as the services are provided to the customer. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period.

Rental of Water Filtration and Related Equipment.  Through the Quench operating platform, the Company generates revenues through the rental of its filtered water and related systems to customers. The rental agreements, which include related executory costs, are accounted for as operating leases and are considered a single unit of account. Billings to the customer for the rental of water filtration and related equipment, which generally occur either monthly or quarterly, are based on the rental rate as stated within the rental agreement. The transaction price is based on the minimum lease payment as stated within the rental agreement. Revenues are recognized ratably over the rental agreement term and amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, in the consolidated balance sheets. Upon the expiration of the initial rental agreement term, the Company may enter into rental agreement extensions in which revenues are recognized ratably over the extension term. Revenues generated under these contracts are recorded as rental revenue within the consolidated statements of operations and comprehensive income.

Sale of Water and Related Filtration Equipment, Coffee and Consumables.  Through the Quench operating platform, the Company enters into contracts with customers with a single performance obligation to sell customers water and related filtration equipment, coffee and consumables. The Company recognizes revenues at the time the equipment, coffee or consumables is transferred to the customer, which can be upon either shipment or delivery to the customer. The

transaction price is based on the contractual price with the customer. Shipping and handling costs paid by the customer are included in revenues. Billings to the customer for the sale of water and related filtration equipment, coffee and consumables occur at the time the product is transferred to the customer and is based on contract price. Revenues generated under these contracts are recorded as other revenue within the consolidated statements of operations and comprehensive income.

Services on Water and Related Filtration Equipment.  Through the Quench operating platform, the Company enters into contracts with customers with a single performance obligation to provide services, including maintenance, on customer-owned water and related filtration equipment. Billings to the customer for services, which generally occur either monthly or quarterly, are based on the service rate as stated within the service agreement. The transaction price is based on service rate as stated within the service agreement. The Company recognizes revenues as the services are provided to the customer. Amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, on the consolidated balance sheets. Revenues generated under these service contracts are recorded as other revenue within the consolidated statements of operations and comprehensive income.

Contract Costs

Contract costs includes contract acquisition costs, deferred lease costs and contract fulfillment costs which are all recorded within other assets in the consolidated balance sheets.

Contract acquisition costs consist of incremental costs incurred by the Company to originate contracts with customers. Contract acquisition costs, which generally include commissions and other costs that are only incurred as a result of obtaining a contract, are capitalized when the incremental costs are expected to be recovered over the contract period. All other costs incurred regardless of obtaining a contract are expensed as incurred. Contract acquisition costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs relate. There were no contract acquisition costs as of March 31, 2018 and December 31, 2017.

Deferred lease costs consist of initial direct costs incurred by the Company to originate leases, which generally include water filtration and related equipment by the Quench operating platform. The costs capitalized are directly related to the negotiation and execution of leases and primarily consist of internal salaries and benefits as lease origination activities are performed internally by the Company. Deferred lease costs are amortized on a straight‑line basis over the lease term. Deferred lease costs, net as of March 31, 2018 and December 31, 2017 were $3.3 million and $3.2 million, respectively and are recorded in other assets in the consolidated balance sheets.

Contract fulfillment costs consist of costs incurred by the Company to fulfill a contract with a customer and are capitalized when the costs generate or enhance resources that will be used in satisfying future performance obligations of the contract and the costs are expected to be recovered. Contract fulfillment costs capitalized generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required fulfill the contract. Contract fulfillment costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the contract term, on a basis consistent with the transfer of good or services to the customer to which the costs relate. Contract fulfillment costs, net as of March 31, 2018 and December 31, 2017 were $1.1 million and $0.8 million, respectively, and are recorded in other assets in the consolidated balance sheets.

Contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company had no impairment charges related to contract costs during the three months ended March 31, 2018.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business combination. Goodwill is reviewed for impairment at least annually during the fourth quarter and more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test is optional.

Under the quantitative analysis, the recoverability of goodwill is measured at each of the Seven Seas Water and Quench reporting unit levels, which the Company has determined to be consistent with its operating segments, by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. The Company determines the fair value of its reporting units based on a weighting of the present value of projected future cash flows (the “Income Approach”) and a comparative market approach under both the guideline company method and guideline transaction method (collectively, the “Market Approach”). Fair value using the Income Approach is based on the Company’s estimated future cash flows on a discounted basis. The Market Approach compares each of the Company’s reporting units to other comparable companies based on valuation multiples derived from operational and transactional data to arrive at a fair value. Factors requiring significant judgment include, among others, the determination of comparable companies, assumptions related to forecasted operating results, discount rates, long‑term growth rates, and market multiples. Changes in economic or operating conditions, or changes in the Company’s business strategies, that occur after the annual impairment analysis and which impact these assumptions, may result in a future goodwill impairment charges, which could be material to the Company’s consolidated financial statements.

Other intangible assets consist of certain trade names, customer relationships, contract intangibles and non‑compete agreements. Contract intangibles includes the fair value of future cash flows from contracts with customers in excess of the fair value for the remaining performance obligations under such contracts. Trade names and non‑compete agreements which have a finite life are amortized over their estimated useful lives on a straight‑line basis. Customer relationships and contract intangibles which have a finite life are amortized on an accelerated basis based on the projected economic value of the asset over its useful life. Intangible assets with a finite life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite‑lived intangible assets, which consist of certain trade names, are not amortized but are tested for impairment at least annually or more frequently if events or circumstances indicate the asset may be impaired.

Adoption of New Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires the recognition of income tax consequences of intercompany asset transfers other than inventory at the transaction date. This guidance will be effective for annual reporting periods beginning on or after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted as of the beginning of an annual period. The Company adopted this guidance on January 1, 2018 on a modified retrospective basis. There was no impact to the consolidated financial statements as a result of this adoption.

In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers which specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods and will require enhanced disclosures. In addition, the FASB issued authoritative guidance in March 2017 related to the determination of the customer in a service concession arrangement, which is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods.

The Company adopted the guidance regarding both revenue from contracts with customers and the determination of the customer in a service concession contract (together referred to as the “Adopted Revenue Guidance”) on a full retrospective basis on January 1, 2018 by applying the guidance to all contracts that were not completed as of January 1, 2016. Results for periods beginning after January 1, 2016 have been adjusted to conform to the Adopted Revenue Guidance while periods prior to January 1, 2016 continue to be reported under the accounting standards in effect for the prior periods. Several of the Company’s contracts were impacted primarily due to the

identification of multiple performance obligations within a single contract. However, the Adopted Revenue Guidance has had no cash impact and, therefore, does not affect the economics of our underlying customer contracts. As a result of the adoption, the Company recorded a cumulative net increase of $8.4 million to accumulated deficit as of January 1, 2016.

For periods prior to January 1, 2018, the Company restated both the consolidated financial statements and the materially impacted notes to the consolidated financial statements for the Adopted Revenue Guidance. The impacts to the previously reported results are as follows (in thousands, except per share amounts):

In addition, the impacts to the consolidated statements of cash flows for the three months ended March 31, 2017 included a reduction to net cash provided by operating activities of $0.2 million and an increase to net cash used in investing activities of $0.2 million. 

New Accounting Pronouncements to be Adopted

In February 2016, the FASB issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. In January 2018, the FASB proposed additional authoritative guidance which provided an option to apply transition provisions under the standard at adoption date rather than the earliest comparative period presented as well as added a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. Once finalized, this guidance will be effective, in conjunction with the new lease standard, for annual reporting periods beginning on or after December 15,

2018, including interim periods within those annual periods, and early adoption is permitted. The Company has developed its assessment approach and has begun evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements. The Company expects to elect the practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. For lessor accounting, as a result of electing the practical expedients provided, the Company does not anticipate material changes to the accounting for operating leases or sales-type leases that existed at the adoption date. For lessee accounting, the Company expects to recognize a lease liability and right-of-use asset for operating leases with a term of more than 12 months. During the fourth quarter of 2017, the Company decided to forego early adoption and adopt the standard on January 1, 2019. The Company continues to evaluate the potential impact of the accounting and disclosure requirements on the consolidated financial statements and expects to finalize its assessment during 2018.

Reclassification

The Company has historically classified the receipt of principal on long-term receivables as a  cash inflow from investing activities in the consolidated statements of cash flows. During the first quarter of 2018, the Company reclassified the receipt of principal on long-term receivables as a cash inflow from operating activities in the consolidated statements of cash flows. The Company believes the change in classification is preferable as the presentation of the collection of principal on long-term receivables as a cash inflow from operating activities more clearly reflects cash received from the Company’s core operating activities as long-term receivables. In addition, the reclassification is expected to improve transparency of cash flows generated from existing operations. This reclassification, which will be applied retrospectively to all periods prior to March 31, 2018, will not result in a change to the consolidated balance sheets, or the consolidated statements of operations and comprehensive income, or any component therein, including loss from operations, comprehensive income, current assets, total assets or shareholders’ equity. In the consolidated statements of cash flows, the Company reclassified $1.1 million of principal collected on long-term receivables from cash flows from investing activities to cash flows from operating activities. Inclusive of both the impacts for the Adopted Revenue Guidance noted previously and the reclassification of the principal collected on long-term receivables, net cash provided from operating activities was adjusted to $6.2 million from $5.3 million and net cash used in investing activities was adjusted to $(3.4) million from $(2.5) million. Cash equivalents and restricted cash at March 31, 2017 remained unchanged.

3. Business Combinations and Asset Acquisitions

Business Combinations

Wa-2 Water Company Ltd.

On March 1, 2018, Quench Canada, Inc., a wholly-owned subsidiary of the Company, acquired substantially all of the water filtration assets and assumed certain liabilities of Wa-2 Water Company Ltd. (“Wa-2”), pursuant to an asset purchase agreement for an aggregate purchase price of $5.1 million in cash, including an estimated working capital adjustment of $31 thousand (the “Wa-2 Acquisition”).  Approximately $0.3 million of the aggregate purchase price, subject to adjustment, is held in escrow for a period of one year by a third party for seller indemnifications. Wa-2 is a  POU water filtration company based in Vancouver, British Columbia. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

Related transaction costs incurred by the Company during the three months ended March 31, 2018 were $86 thousand, which were expensed as incurred within selling, general and administrative (“SG&A”) expenses in the consolidated statements of operations and comprehensive income.

The Quench business completed the Wa-2 Acquisition to expand its installed base of point-of-use systems.

The following table summarizes the preliminary purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed (in thousands):

Due primarily to the timing of the acquisition and the complexities involved with determining fair value of the intangible assets acquired, the Company has not yet completed the valuations of the identified intangibles. The preliminary purchase price allocation has been developed based on preliminary estimates of fair values using the historical financial statements of Wa-2 prior to the acquisition along with assumptions made by management. Although the Company does not expect the final allocation to vary significantly, there may be adjustments made to the purchase price allocation that could result in changes to the preliminary fair values allocated, assigned useful lives and associated amortization recorded.

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reporting unit.

The results of the operations of the acquired Wa-2 assets are included in the Quench reportable segment after the date of acquisition. The resulting amount of revenues and net loss included in the consolidated statements of operations and comprehensive income since acquisition were $0.2 million and $0.1 million, respectively.

Wellsys USA Corporation

On September 8, 2017, Quench USA, Inc. (“Quench”), a wholly-owned subsidiary of AquaVenture Holdings Limited, acquired substantially all of the assets and assumed certain liabilities of Wellsys USA Corporation (“Wellsys”) pursuant to an asset purchase agreement for an aggregate purchase price of  $6.9 million in cash, including a final working capital adjustment of $165 thousand (the “Wellsys Acquisition”) which was received from the escrow agent in October 2017. Wellsys is a supplier of high quality branded and private-labeled POU water coolers and purification systems. Headquartered in the greater Phoenix, Arizona area, Wellsys sells its products to a network of dealers throughout the United States, Canada, Mexico and South Africa.

There were no related transaction costs incurred by the Company during the three months ended March 31, 2018 and 2017.

The Quench business completed the Wellsys Acquisition to be able to participate more broadly in the global POU market through the Wellsys distribution network. In addition, the acquisition provides an opportunity to develop, source and distribute Quench-exclusive innovative coolers and purification offerings, and to develop relationships with Wellsys dealers that could ultimately lead to potential acquisitions.

The following table summarizes the preliminary purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed (in thousands):

Pro Forma Financial Information

The following unaudited pro forma financial information (in thousands, except for per share amounts) for the Company gives effect to the acquisitions of Wa-2 and Wellsys, which occurred on March 1, 2018 and September 8, 2017, respectively, as if they had occurred on January 1, 2017. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

Asset Acquisitions

Clarus Services and Watermark USA

On January 15, 2018, Quench separately acquired substantially all the assets and assumed certain liabilities of Clarus Services (“Clarus”), a POU water filtration company based in Richmond, Virginia, and Watermark USA (“Watermark”), a POU water filtration company based outside of Philadelphia, Pennsylvania, pursuant to asset purchase agreements. The assets acquired consist primarily of in-place lease agreements and the related POU systems. The aggregate purchase price for both acquisitions  was approximately $1.6 million, including $1.6 million in cash and $40 thousand payable on the one year anniversary of the transactions that is subject to adjustment.

The revenues and related expenses from the acquired in-place lease agreements are included in the Quench reportable segment after the date of acquisition. The Quench business completed the Clarus and Watermark asset acquisitions to expand its installed base of POU systems in the United States.

As the acquisitions of the Clarus and Watermark assets did not meet the definition of a business combination, the Company accounted for these transactions as asset acquisitions. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. In addition, related transaction expenses are capitalized and allocated to the net assets acquired on a relative fair value basis. Related transaction costs incurred by the Company in connection with these acquisitions during the three months ended March 31, 2018 were $27 thousand.

 The following table summarizes the aggregate amounts for both the Clarus and Watermark acquisitions which were allocated to the fair value of aggregated net assets acquired (in thousands):

The assets in the purchase price allocations are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. The customer relationships were valued using an excess earnings approach, which is based on the present value of expected cash flows generated by the revenues under the contract with the customer. The weighted average useful life of the acquired customer relationships is approximately 12 years from the date of acquisition. 

4. Revenue

Disaggregation of Revenue

The following table represents a disaggregation of revenue for the three months ended March 31, 2018 and 2017, along with the reportable segment for each category (in thousands):

Contract Assets and Liabilities

Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in advance of performance under the contract or for differences between the amount billed to a customer and the revenue recognized for the completed performance obligation.

The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands) at March 31, 2018 and December 31, 2017: 

Significant changes in the contract asset and the contract liability balances during the period are as follows (in thousands):

The Company had no asset impairment charges related to contract assets during the three months ended March 31, 2018.  

Transaction Price Allocated to the Remaining Performance Obligation

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands). The estimated revenue does not include amounts of variable consideration, including revenues based on changes to consumer price indices, that are constrained. In addition, the estimated revenue is based on current contracts with customers and does not take into consideration contract terms not legally enforceable with the customer.

The amounts presented in the table above primarily consist of bulk water sales and service, service concession arrangements, the rental of water filtration and related equipment and services on water and related filtration equipment. The transaction price for bulk water sales and service and service concession arrangements are based on contractual minimum monthly charges and the expected amount of variable consideration related to the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and the contractual rates. The remaining performance obligations to be performed generally include the delivery of bulk water or performance O&M services with revenues being recognized as the remaining performance obligations are delivered to the customer.

The transaction price for rental of water filtration and related equipment and services on water and related filtration equipment are based on the rental or service rates as stated within the agreements. The remaining performance obligations to be performed generally include the continued rental of the water filtration and related equipment or the performance of services with revenues being recognized as the remaining performance obligations are delivered to the customer.

5. Fair Value Measurements

At March 31, 2018 and December 31, 2017, the Company had the following assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:

There were no transfers into or out of Level 1, 2 or 3 assets during the three months ended March 31, 2018. Transfers between levels are deemed to have occurred if the lowest level of input were to change.

The Company’s fair value measurements as of March 31, 2018 and December 31, 2017 were as follows (in thousands):

6.  Other Intangible Assets

The gross and net carrying values of other intangible assets by major intangible asset class as of March 31, 2018 and December 31, 2017 were as follows (in thousands):